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Far-reaching reforms to insurance law - and what action to take

The Insurance Act 2015 (the Act) will come into force on 12 August 2016 and is set to have far-reaching effects on how businesses handle their insurance policies and renewals. The Act will affect non-consumer contracts and any amendments made to existing non-consumer contracts after 12 August 2016

Whatever the size of your business, you need to be aware of some key changes ahead.

More onerous disclosure

There will be a more onerous duty to disclose information before taking out a policy. Both the insured and the insurer will have to engage actively in the disclosure process when entering into commercial insurance contracts. The insured must continue to act in "good faith" when reviewing information to disclose to the insurer and follow the Act's guidelines on disclosure. To comply with the duty of disclosure, the insured must disclose "all relevant circumstances which it knows or ought to know", based on a new requirement to undertake a "reasonable search". The material disclosed must be presented to the insurer "in a reasonably clear and accessible manner to a prudent insurer''.

A “reasonable search” for relevant information will include a search for information “held within the insured’s organisation or by any other person such as a broker". This is a wider obligation and will require more work for policy seekers.

The Act guides the insurer on how much information it must collate and the insurer must pursue further enquiries if insufficient information is provided. The insured can comply with its disclosure duty if it gives the insurer sufficient information, in a reasonably clear and accessible way, to put it on notice to enquire for further information. (Previously, this was not a defence to a breach of disclosure.)

A ban on breaches of warranty leading to loss of cover

Currently, insurers can convert the insured's representations into contractual warranties. This enables insurers to argue they are discharged from the insurance contract if the insured is in breach of warranty – and avoid the cover. Part 3 of the Act bans this type of "basis of the contract" clause from non-consumer insurance contracts. An insurer will no longer be able to convert all representations into contractual warranties. If an insured breaches a warranty, depending on the gravity of the breach, the insurance cover could be avoided (if the breach was deliberate or reckless) or it could, for example, be suspended for a lesser breach – but only for so long as the insurer is in breach. Cover must be reinstated when the insured remedies the breach. This cannot be contracted out of the agreement. Another option would be for the insurer to reduce the cover.

How will the Act work in practice?

Inevitably, there will be disputes on how to interpret the Act and it may well be a few years before businesses and insurers know exactly what is expected of them by way of disclosure. In the meantime, all those in the construction industry should review their insurance practices to ensure that internal procedures are compliant with the Act and that the level of disclosure is tailored to the likely risk inherent in the particular project.

Action to consider for businesses

Review your insurance procedures and ensure that those with responsibility for your insurance cover are ready for the new laws. Provide training if necessary to ensure that those involved fully understand the new disclosure obligations.

There needs to be a robust audit trail of action taken. Set up a system for recording who does what, when and what was disclosed as part of the process of taking out cover – for each policy. Ensure that the thought processes that go into deciding what amounts to a reasonable search are also recorded.

Clarify the chain of command to ensure that, where appropriate, senior managers make the final decisions on what is disclosable.

Review your procedures for insurance renewals. Ensure the process includes enough time to discuss the disclosure requirements with the insurer: you might be able to negotiate less onerous disclosure obligations.

Prior to August 2016, check whether your insurer is amending provisions of your policy. Your approach to amendments being made could differ depending on the type of policy. Speak to your broker and find out what they are doing on your behalf in relation to the impending new laws.

If you want to discuss the changes, speak to one of our team listed on the right.

Amendments to the Insurance Act 2015 are already set to take effect next year

It's worth noting that amendments to the Insurance Act have already been set in motion under the Enterprise Bill, which has received Royal Assent, to become the Enterprise Act 2016. The Enterprise Act will change the Insurance Act 2015 (dealt with above) by imposing penalties on insurers who do not make prompt payments to claimants(1). This will be done by implying a term into insurance contracts that insurers will pay claims within a reasonable time. If the insurer breaches this implied term, the insured will be able to claim for losses suffered as a result of the breach subject to bringing the claim within a limitation period of one year from the date that the insurer pays in full or settles the claim.

The Act, which comes into force on 4 May 2017, will be welcomed by businesses especially those who rely on insurance payments to get back on their commercial feet after events such as the recent floods. However, there will be no automatic pay-outs: businesses will still need to set out the facts, prove the cause of any loss suffered and take appropriate action to mitigate their loss. In addition, there is no definition of what amounts to a "reasonable" amount of time – what is reasonable will depend on the specific circumstances of the claim.

Insurers can contract out of the new provisions. Check your policies and negotiate if necessary.

Insurers will be liable for loss caused by late payment only if it was foreseeable. Therefore, if late payment of a claim is likely to cause loss to your business, notify the insurer. The insurer will then have less chance of arguing that the loss was not foreseeable.

Be prepared for insurers to offer you an interim payment in the event of a claim.

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